After months of research and analysis, you have now decided to expand your business to a new country.
Should you go green-field and start a new branch? Should you acquire an existing business in the new location? Should you bring your star product to the new country or develop a new version for the local consumers?
There are many questions you need to answer. Before selecting specific tactics for your expansion, many companies fail to perform an important preparation step: deciding on the overall expansion strategy.
What value can your company’s core competency create by operating in a new country?
In his article published in Harvard Business Review in 2007, Professor Pankaj Ghemawat of New York University and IESE Business School presented the AAA Triangle framework. This framework aims to help companies decide on the most appropriate overall strategy for creating value through international expansion.
The AAA Triangle highlights 3 generic international strategies – Adaptation, Aggregation and Arbitrage.
Adaptation focuses on ‘localization’ – tailoring products or business models to the preference of the local market. Companies with this strategy often develop products customized to the specific country. They may also have a decentralized management philosophy where location managers have a high degree of autonomy. This makes it easy to react quickly to any change in local market trends or other business landscapes.
Looking around the market, it is easy to spot many champions of this strategy: Disneyland making ‘Mulan’ a highlight in its Shanghai theme park, Kitkat introducing matcha flavored chocolate bar in Japan, KFC selling rice congee for breakfast in China..
Adaptation is the most commonly-used strategy. It is especially crucial for companies whose products have to cater to local consumers’ taste and preferences (e.g. FMCG company, B2C service company, etc).
Over the years, btrax has helped our clients successfully integrating their products and services with the Asian market. Some clients we have worked with include Expedia, TripAdvisor and Toys R Us. Check out our works here
Aggregation focuses on ‘standardization’ – creating or utilizing existing economies of scales across multiple locations. Companies with this strategy tend to leverage already established products or expertise, and market them to the new location through active advertising. R&D and management for multiple countries are also often centralized at a regional or global level.
An example of a company mastering this strategy is the Japanese automotive giant – Toyota. Toyota’s production is concentrated in Japan. FY2015, Toyota reported 8.9million units of cars produced worldwide. Of these, almost 4.1million units are produced in Japan. The huge scale of production in Japan allows Toyota to enjoy lower cost, higher efficiency, and quality control. At the same time, the concentration of facilities makes implementation easier as Toyota continue pushing out series of cost-saving initiatives.
Arbitrage focuses on ‘exploiting’ differences between locations for the benefit of the whole organization. Production cost is the most typical example – e.g. having factories in locations with lower raw material and labor cost. This strategy typically benefits labor intensive or vertically integrated companies.
One of the most prominent examples is perhaps Apple outsourcing manufacturing and assembly process to China (mainly to Foxconn). In 2013, Forbes estimated that if Apple brings back manufacturing to the US, it would incur $4.2billion extra cost.
What approach should your company take?
It is tempting to adopt all three approaches to enjoy the full benefit. However, it is rarely achieved in reality. The inherent conflicting nature of the three strategies and the amount of resources required make it difficult to achieve a balance.
Companies who successfully adopt a combination of all three often spend years in trial-and-error. Among others, P&G is a great example. P&G started its global expansion with an adaptive-arbitrage strategy. They focused extensively on locational R&D and creating autonomous mini-P&G branches in each location. Meanwhile, they outsourced a certain part of the production process to cheaper locations.
It is advisable for companies to focus on one, or at most two strategies when expanding its operations globally.
Years later when this localization strategy produced too much redundancy across regions, P&G added an element of aggregation and created a matrix organization structure to focus on creating synergy across regional business units and product lines.
It is advisable for companies to focus on one, or at most two strategies when expanding its operations globally. Companies should examine its own business nature and strength before deciding the primary strategy. After a directional overall strategy is chosen, companies can then proceed to explore tactics to execute the chosen strategy.
Contact btrax today on how we can help you with your strategy.
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